The Housing Crisis. Move Your Money, Not Yourself

You earn a great salary, have a professional career, and can’t buy a home. You aren’t saving much (if at all) for retirement, which feels like it’s decades away but will inevitably come. Odds are that you live in a metropolitan area of California or New York. Residents on both coasts face this same angst, but there is a solution: Move your money, not yourself!

The unaffordability plight is best illustrated in California, the center of the universe for technology, upon which almost everything in the industrialized world currently depends. With an influx of highly skilled workers and peripheral businesses, California’s population grew 4.1 percent from April 2010 to July 2016. The estimated median family income for fiscal year 2017 is $80,458. But to purchase the median-priced home in California’s metropolitan areas requires an income upwards of $120,000. Families double up and move farther and farther away from employment centers; they can’t save a down payment, and if they could, good luck finding a nice home and getting an offer accepted in such a competitive market.

According to Leslie Appleton Young, chief economist for the California Association of Realtors, the demand for housing is undersupplied by 65,000 new units annually, and the migration inland to other states and cities has already begun. We may never be able to meet the demand—at prices most would-be buyers can afford. Increasingly, high earners have no tax shelter for their incomes and are not building equity for their future

There are loan programs that attempt to bridge the affordability gap: Fannie Mae now offers the HomeReady loan, which requires only a 3 percent down payment and allows residents to pool their income to qualify, and FHA offers a 3.5 percent down loan. But low down payment offers are hard to get accepted in a sellers’ market. Listing agents usually advise clients to take an all-cash or 20 percent down offer because such deals are just easier to close. And even if financing were not an issue, there still isn’t enough supply to meet the ever-growing demand.

We can’t expect government to solve this problem, although it tries. In the San Francisco Bay Area, voters had 17 measures on last November’s ballot to deal with rent control, affordable housing and homelessness. San Francisco, Berkeley and Oakland have had rent control for years. Did it curb sale prices or increase the pool of rentals? Not by a long shot. UC Berkeley’s Terner Center for Housing Innovation which studies innovative ways to solve the housing crisis, came up with a lease-to-own model that mimics the old lease option purchase plan wherein a tenant “rents to own” a home. Nice try, but in an escalating market, lease options are anathema to sellers (and their agents). Efforts to fix the problem are Band Aids, at best.

During The Great Migration of the early 1900s, workers in the rural South followed the jobs to industrialized cities in the North and Midwest. The Second Great Migration, in the 1940s, extended to California and other western states. In this century, we have jobs in California but there is not enough housing for most individuals and families to live the lifestyle they want. As our ancestors did, we too must migrate, in this case, either ourselves or our money by investing in rapidly growing cities in other states where it (and our tax deductions) will grow. It’s not that scary. Professional property management is part of the equation.

To make this happen, you need real estate with a positive cash flow and appreciation. Yes, it’s possible to have it both ways, if you leave the populous coasts. Two of the top ten cities in the U.S. for job growth according to Forbes are Cape Coral, Florida (in health care, retail, and construction to serve the influx of retirees) and Tucson, Arizona (education, health care, and hospitality). In the following two scenarios, I look at recent sales of median-priced homes in those cities. The third scenario is a median-priced home sale in the San Francisco Bay area of Concord. These examples compare the cost of purchasing and renting out a median-priced home in Cape Coral and Tucson to purchasing and occupying a median-priced home in California.

Example #1: 10080 E. Lucille Dr., Tucson, Arizona. A three-bedroom, two-bath home that sold in May 2017 for $150,000. Details of the financing and monthly payments for a non-owner-occupied purchase include: 25% down payment ($37,500), 4.25% interest rate, and a 10% property management fee. The total principal, interest, property taxes, insurance and property management fees amount to approximately $931 a month. Estimated rental income would be $1,200 per month, yielding a $269 monthly positive cash flow.

Example #2: 2707 SW 32nd St., Cape Coral, Florida. A three-bedroom, two-bath home that sold in May 2017 for $204,000. The down payment would be $51,000 (25%), and total monthly non-owner-occupied payments would be approximately $1,311 per month. Monthly rent is estimated at $1,450, yielding a $139 monthly positive cash flow.

Compare those two examples to Example #3, the purchase of a three-bedroom, two-bath median-priced* personal residence in the San Francisco Bay Area. For point of discussion: 5740 Amaranth Place in Concord, California, which sold for $712,000 in April 2017. With 20 percent down (to compete against FHA and other low-down payment options), costs would be a $142,400 cash down payment with monthly principal, interest, taxes, and insurance totaling approximately $3,584.

Many workers in the San Francisco Bay Area meet the qualifying income level for the corresponding monthly expense, but few can actually come up with the down payment. Each year that gets more difficult. Each year people lose the appreciation and tax deductions that investing outside California could afford them.

Taking the plunge and buying a house is nerve-racking anytime. Purchasing for investment, away from home, ups the angst. But not owning real estate is a far greater threat to your well-being. Buying real estate is a risk, but it’s a calculated risk. Unlike stocks and securities, land and its improvement have intrinsic value. People will always need a roof over their heads.

Risks of being an out-of-state “absentee landlord” can be minimized with professional property management to maintain the property and to screen tenants, and with home warranties that cover nuisance repairs (including some major ones, such as furnace replacements). Hazard insurance may cover major property damage. Buying in a city with good projected job growth should assure appreciation, and such areas typically have low vacancy rates. Tax deductions for property maintenance, improvements and depreciation can lower your personal income taxes and improve your bottom line. If that increases your spendable income, well, then, you can afford a better home to lease in the expensive city where you do live. Regardless of how much net rental income you make each month, you are becoming invested and building equity. Always discuss the ramifications of a real estate purchase with your tax adviser before doing anything. And don’t just invest and forget; keep an eye on the area’s economy and employment forecasts.

Ultimately, owning real estate will assure that you can retire someday. If you think it’s hard living the quality of life you enjoy now while you’re working, think how much harder it will be when you aren’t earning as much, you have a mortgage or rent payment, and your only expenses that dropped are clothing and transportation.

Investing out of state can have more immediate benefits, too. If you choose a high-growth city with jobs in your field of expertise, you may want to convert your rental to your own personal residence and move there yourself. You’ll pave the way for a better transition if you already own property in that area. As many technology firms open hub offices, relocation opportunities are increasing. Some high-growth areas like Austin, Texas, have already begun to exceed the break-even price for investment. Get in now, before that happens in a city you like.

If you do relocate, purchase, and then decide to move again, do not sell the house. To keep building a nest egg, you must hold on to property. Every time you buy and sell, it reduces your equity by thousands of dollars. Keep your money invested.

So, yes, there is a solution to the affordability problem in our major metropolitan areas: move your cash, if not yourself.

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*$709,000 in March 2017 per CoreLogic

Please note: there are many variables in the customary costs and financing of real estate. The examples used here reflect typical costs at the time of writing. Consult a Realtor, lender, and tax adviser before pursuing these strategies.